Apple, the EU, and Country by Country Reporting

By Kash Mansori
Posted: February 01, 2017

The story of Apple Inc. and the European Commission is well known by now. Back in August of 2016 the EU’s Competition Commission announced their ruling that Ireland had given Apple an unfair sweetheart deal allowing it to pay less tax in Ireland than it should, and ordered Ireland to send Apple a €13 bn bill for back taxes and interest covering the period 2003-14. For their part, Ireland and Apple both have said that they intend to fight the ruling. The legal battle is likely to go on for years, and may well end up at the highest court in the EU, the European Court of Justice.

There are many interesting aspects to this story. First of all, there’s the issue of how the ongoing campaign by the EU Competition Commission to examine tax matters may effectively give it significant oversight of the EU’s tax and transfer pricing policy. I think it’s fair to say that this was an unforeseen development in transfer pricing enforcement even just a few years ago.

Secondly, the case touches on some interesting technical tax and transfer pricing issues, including but not limited to: the role of holding companies in the tax structures of MNEs; the use of transfer pricing rules on intangibles for tax planning purposes; the ways that US corporate income tax deferral impacts tax policy and enforcement outside the US; how the concept of "fairness" applies to international taxation, and how it may sometimes be at odds with the arm's length standard; and, perhaps most significantly, how tax letters or rulings by their very nature may be viewed by some (such as the EU Competition Commission) as “unfair”, even when those rulings are intended to simply reflect how the existing laws pertain to a specific taxpayer and its particular set of circumstances.

But in reading a nice background article by BNA on the Apple case the other day, I was struck by another significant implication of the Apple story: it’s a perfect illustration of how the new BEPS rules on Country by Country Reporting ("CBCR") could affect MNEs in the years to come. (See this post for more about the important topic of CBCR.)

The BNA article, “The Inside Story of Apple’s $14 Billion Tax Bill” (subscription required), provides some new details about how the Competition Commission came to make its unprecedented ruling against Apple and Ireland. One bit that particularly caught my attention:

Vestager, a daughter of two Lutheran pastors, has a reputation for being even­handed but tough, cutting unemployment benefits while advocating strict new rules for banks when she served as Denmark's finance minister. While she has acknowledged that her team had little experience with tax rulings—in a November interview with France's Society magazine, she said, “We learned on the job”—Vestager says enforcement of EU rules on taxation is a matter of “fairness.”

In the meeting with Cook, she quizzed him on the tax Apple paid in various jurisdictions worldwide. She told the Apple executives that “someone has to tax you,” according to a person present at the meeting.

This seems to suggest that the Competition Commission began focusing on the Apple-Ireland tax situation not because of any technical concerns about the arrangement, but simply because it appeared to them that Apple was not paying enough tax. The tax outcome that Apple had achieved was what initially drew the Competition Commission’s attention, plain and simple.

And that is exactly what CBCR is designed to reveal to tax authorities around the world: tax outcomes. In effect, CBCR will make it less important whether a particular tax planning or transfer pricing approach adopted by a MNE is technically correct, and more important what the end result of that tax planning strategy looks like in terms of actual taxes paid. Of course, once under scrutiny then it will still be important that a taxpayer’s tax and transfer pricing policies be as defensible as possible… but the story of Apple and the EU underlines – with a bright fat yellow highlighter – the fact that CBCR will probably make it more likely than ever before that scrutiny by tax authorities will be guided by the actual tax outcomes reported by MNEs.